Taxes don't have to be hard

In an interview with The Atlantic's Derek Thompson, tax expert Roberton Williams advocates one of my favorite policies: Giving people the option of letting the IRS calculate their taxes automatically.

The IRS knows everything they need to know for most tax papers. They know your income from the W-2 and 1099. They know your mortgage interest. Presumably they know the charitable organizations that you give money to, because those organizations could report the amounts. If you put money into a 401k or IRA, a bank can report that. That' s most of what you need. The information comes to the IRS. Most of us do have straightforward tax returns. The IRS can do that. That would take a big load off of people. As simple as it is, people should be able to look at a simple tax form and say: "Yep, that's what I earned. That's what I give to charities." It takes a lot of pressure off people.

There's a reason why almost 80 percent of us have other people do our taxes. We don't want to be hassled. It's easier to let the software do they job. I do TurboTax tax And I wonder why the numbers are what they are. And I'm a tax expert!

That policy, incidentally, is included in the new Wyden-Gregg tax reform bill, of which I'll say more later. But if you want to read up on your own, head here. They've got a sample tax form (pdf) and a two-page summary (also pdf) that includes this tidbit: "The IRS estimates that Americans spend 6.6 billion hours each year filling out tax forms and roughly $194 billion each year on tax compliance." It doesn't have to be this way!

Tax returns are at this point largely tools for use by the incumbency: complex tax forms, which are submitted under oath, give rise to the frivolous perjury and fraud charges which are frequently used in an attempt to silence the out-of-power crowd. An old adage recalls that Capone was convicted for tax evasion, not murder... more modern cases see (for example) people who challenge the beef industry subjected to tax scrutiny by pro-beef administrations and lobby corporations favoring administration positions exempted from similar scrutiny.

The whole tax process could be made a bit more fair and efficient; however, I'm skeptical that any administration would give up the power.

Ezra, how about Rogers Diffusion of Innovations, a scholarly work first published in 1962 but revised as recently as 2003 just prior to the author's passing. People resist change even to the death. Want to make an enemy? Argue cogently that some deeply held cultural norm is wrong and should be changed. In this case that the US tax code should be changed to something that doesn't require all this effort and you will be asked, "Then what will all those tax people do?"

Otherwise we will cause over one million accountants to go unemployed and put many accounting departments at universities out of business. Not to mention software products and companies like TurboTax/Intuit.

It's really all of the insane deductions that take so much time. If we just made everyone pay the AMT, no deductions, life would be a lot simpler, fraud would drop and everyone would understand how it works.

On the other hand, I have four K-1s this year. No easy way to deal with that, and some of them are going to be late. The good news for you all is that my total tax payments are over $100k this year! Let's put it to good use! :-)

Totally, keep EITC, business expenses, and a deduction for each kid up to a certain number, and get rid of the rest. Great, progressive way to raise revenues, while making the system simpler for people and reducing fraud.

I disagree. I think we should eliminate the mandatory withholding. Make people pay every month just like any other bill. Let's see how popular and essential some programs are once we're writing a check every month.

This sounds good in theory, but in my view to be workable the tax code would have to be substantially simplified. What person in their right mind would trust the IRS to maximize their return if their income is well above average and/or if their tax situation as a whole is at least modestly complicated?

For those whose income is wholly from W2s (or even 1099s) that's a good idea, but it really is about all those deductions (the points on a mortgage or refi, the unusual medical costs in a particular year, the moving expenses for a job relocation).

I'm a freelancer who works from a home office. Even though it's a very small extra income, I can't deal with all the self-employment tax and depreciation on equipment stuff that our accountant does. My spouse also earns extra income from lectures or books, and this has to be set up on separate Schedule Cs too, and then expenses for travel or office supplies computed. We're scrupulous about reporting every $200 bucks we earn this way, even though it's not reported to the government by anyone. I don't see how the government could compute our taxes without the shoebox of receipts we collect every year and a stiff glass of Lagavulin.

*****In Britain and Ireland your taxes are worked out between your employer and the tax office and withheld automatically. This is called PAYE ("pay as you earn").*****

Modicum: The UK and Ireland aren't unique in this regard. As far as I know all rich countries -- including the United States since (IIRC) World War II -- employ automatic withholding. And America does allow tax payers to file a simple, one page tax return form that isn't much more difficult than what you describe (it's called form "EZ" and it takes all of three minutes to complete). The problem in the US is that only persons with modest incomes or extremely simple tax situations can use the form and NOT significantly overpay their tax bill. The eye-wateringly complicated, loophole-ridden US tax code pretty much makes it mandatory for a large segment of the population to "itemize" their return -- that is, to complete the "long" tax form and painstakingly list -- almost always with the aid of an accountant or tax filing software -- the various exemptions, tax credits, deductions and other loopholes for which they qualify. Otherwise they'll overpay the government large sums of money via failure to employ said loopholes.

It IS an insane system, and in my view flows naturally from the US political system, which requires excessive horse-trading and deal-making to enact legislation, given the heavy presence of veto points.

Otherwise we will cause over one million accountants to go unemployed and put many accounting departments at universities out of business. Not to mention software products and companies like TurboTax/Intuit.

Posted by: Lomillialor | March 10, 2010 9:34 AM | Report abuse

If only you cared more for the millions upon millions in the healthcare industry. If you did you'd be all against single payer!

Well, if you've ever dealt with the IRS, you realize that it is a remarkably incompetent organization with a high percentage of employees who aren't quite as smart as the average 10-year-old. As a consequence, the IRS does a truly horrible job of handling its current responsibilities. Vastly increasing those responsibilities would be absurd.

There are some privacy concerns here. Take charitable deductions. You are free right now not to disclose to anyone who you give to. Of course, you do if you want to take them as a deduction, but that's your choice. (And of course you don't really have to disclose until and unless you're audited.) Under the system you're talking about Ezra, the charities would have to automatically report to the feds.

It's bad enough that the feds already get so much data about your economic activity, but at least that's somewhat justifiable as a means of preventing tax evasion. What you're talking about takes it to a whole new level, and all because some lazy people can't take a few hours to do their taxes? Not worth it in my book.

This idea was also proposed in H.R. 6084 in the 110th Congress, but it died in the Committee for Ways and Means (chairman Charlie Rangel).

My father volunteered on the Federal Taxpayer Advocacy Board (TAP) a few years ago, and the board's recommendation to the IRS was very similar. It only applied to people who could fill out very simple taxes on the 1040EZ. Still, that's a large portion of Americans, and it would have made a lot of sense to do that.

The IRS response was that they don't change anything unless Congress passes a law requiring them to do so. That's the separation of powers at work: the Legislative branch sets policy and budget, and the Executive branch implements the policy. So the TAP recommendation died.

The OpenTreasury site recently solicited ideas for improving government, so I added the idea of auto-filing for simple tax returns. Please vote for it! http://opentreasury.ideascale.com/a/dtd/25898-7040

Forget the charitable deductions, then. You don't have to deduct them if you don't want to. If you want to (not a guarantee-- you can only itemize deductions if they are above the standard deduction), then file the right forms. If you don't want to, let the default/automatic system work its course. We have a primitive tax filing system, and I don't think it's worthwhile. Why are we giving all this money to H&R block to do something that in most cases could be done automatically?

Just what I want the IRS having records of every aspect of my finances and then doing my taxes for me. Great. I suppose if they make a mistake you couldn't do anything about it or I guess you could hang out on the IRS help line all day trying to talk to a human being. You want simple tax paying: go flat tax. Everyone pays the same rate no deductions.

Matt Yglesias keeps saying that there's a coalition consisting of the Club for Growth etc. on the one hand, and Turbo Tax et al on the other, that insists that this not be done. CFG wants people to hate paying taxes, and Turbo Tax wants your money so you will use their software because you hate filling out the forms. I don't know if this is true, but he's said it several times.